New Buy:(ARST)

Just off my time in the penalty box I made a small purchase today of ARST at a cost of $14.00 per share. This is just over the $13.95 buy point, and I waited throughout the day until about 3:30pm to get that price - I really didn't want to chase the stock up much past the pivot.


I read the chart pattern as a large, deep cup with a handle that formed with a buy point of $10.10 from the week of January 16th. The volume dried up very nice in the handle looking at the weekly chart, and then exploded on the breakout the week of March 6th. This was the week this new rally began, and it's a positive sign that ARST was one of the first stocks to breakout.

The stock easily advanced 50% from this breakout in just six weeks. Last week it tested support at the 50 dma and came directly off of it, setting the new buy point as the recent high of $13.95.

What I don't like about (ARST) is the relative strength line lagging a bit. What I do like is the massive volume surge as the stock has made this move. It looks to me very reminiscent of (TNDM), (SNDA), (NTES), the other notable winners in this rally.

I would say more than any other factor I now look for that trademark surge in volume with a ratio of something like five weeks of accumulation to one week of distribution as a stocks works on the right side of a base. If the stock breaks out to make an all time high like (TNDM) and (ARST), that's even better. If it's a recent IPO like (TNDM) and (ARST), again - even better.

I've set a 5% stop on my purchase. I still feel the need to build myself a strict set of documented rules for stops and other aspects of my trading. I think without a strict set of rules I will spend too much time (and money) second guessing my decisions. I'll tighten up the stops when I should let a stock run, and vice versa. I think I'm better off picking a fixed percentage and using it on all my purchases. It's something I'll have to spend more time working on.

Rude Awakening

It's a pretty overwhelming task to comment on the market these days. What we're seeing is certainly historic, perhaps a once-in-a-century event. Though we don't have the kind of sell-off that occurred after the tech bubble burst (yet), we're looking at a global recession that is possibly beyond anything we've seen before. The 'VIX' - or volatility index - which measures fear in the market is DOUBLE the previous high level it had reached in almost 20 years it's been measured. Despite this, each time the market looks like it will capitulate, it instead reverses and closes up or down more moderately. Some of this is due to constant governmental interference (necessary or not depending on one's personal views), and some of it has no real explanation. This market seems to befuddle even the most experienced traders.

I still expect to see the S&P 500 in the 700's, and possibly below. I think the PE ratio for the S&P 500 is still too high for the current earnings expectations, which will continue to be revised downward. Of course I don't buy or sell stocks based on what I think, but I do still follow the behaviour of the market and look for 'setups' to the upside or downside. I don't think there is too much harm in forming expectations of what the market or an individual stock will do, as long as I base my decisions on what is happening, not what I think will happen.

As bad as things are the CAN SLIM method has kept me in cash most of the past year. The few times I've invested in rally's I'm made small gains or stopped out for small losses. I'm happy with my risk management and capital preservation this year. Outside of the cost of trading materials, I'm down only a few percent on my trading portfolio.

Friday I used all of the money in my Traditional IRA (about 1/3rd of my trading portfolio) to purchase a fixed income bond fund (LSBRX). I use this same fund for my son's educational IRA, and I've watched it drop from $15 to $10 a share this year. I would never trade a stock this way, but at a yield of close to 9% now and an all time low on the share price I find this an excellent opportunity for that portion of my portfolio. I believe it will provide solid return by the time I want to put that money back to work in stocks. Meanwhile, the remainder of my portfolio is cash.

Over the past year I've given a lot of thought to the concept of risk management and capital preservation as the most important factor in trading. Since I began investing, I was always aware of the potential for a catastrophic loss on an individual stock, but felt I had this risk managed well with my stop loss orders (never more than 8% below my purchase price). I knew this system does not remove all chance for a catastrophic loss, but felt that it mitigates the risk sufficiently.

Then last night a friend emailed me about a stock that I've owned a couple of times in the past few months - (THOR). This stock has held up better than anything I've seen through this bear market, and was on the top of my watchlist. That is, it was on the top of my watchlist. My friend brought to my attention a news release after the market closed on Friday, where in short (THOR) stated that:

...wear and fatigue related to its implanted heart pump may require surgical replacement that could potentially be fatal...

...In five of these cases, patients expired as a pump replacement was not feasible...

Shares dove to $12 in after hours trading.

IF I'd still held (THOR), there isn't a thing I could've done to foresee this event or protect myself from the price move after-hours (same might even be true if the news came out while the market was open). This stock looked great and showed all the signs of institutional support, then without warning lost half of it's value. That is a very sobering realization for me.

I really still haven't come to terms with this. I plan on doing some research to see if there are further steps I can take to protect myself. I'd like to think the method I use had me out of the stock before the news came out, but couldn't this just as easily have happened if I owned the stock during a rally? I owned (THOR) a week ago - couldn't they have released this news then? Certainly the answer is yes.

This is a further reminder to me what a serious thing stock investing is. It's not nearly as 'fun' as it was when I began - and I think that's good. It's a business, a second job, and a risky one. I need to approach it without emotion, follow my rules, and be aware constantly that the market is still very random and can humble me at any time. It certainly got my attention yesterday.

-Geoff

New Buy: (LSBRX) and Portfolio Management

I didn't think to post about a new buy I made last week, because it wasn't really a stock trade. Today I got to thinking since I consider it part of my trading portfolio, I should treat it like any other stock trade with this capital.

I consider myself to have three different sections to my portfolio: my 401k through work, my Roth IRA, and my Trading capital.

I contribute 7% of my income to my 401k - that's the maximum amount that my company matches with a 25% contribution. Nothing like getting an immediate 25% return the first year you add to your capital! These funds are split just about evenly among three mutual funds: an S&P 500 Index Fund, an International Fund, and a Small Cap Value Fund.

I also contribute the maximum I'm allowed to my Roth IRA on a monthly basis. Like my 401k, these funds are split pretty evenly into mutuals: an Energy Fund, a Mid Cap Growth Fund, and an International Fund. I'm probably too heavily weighted in International funds and will look to shift some of that weighting to the Small Cap Value and Mid Cap Growth Funds.

Finally I have my trading capital, which includes a cash account and a Traditional IRA account. The Traditional IRA is a small amount that I had saved before the Roth existed. Because I'm optimistic that I'll be better off in retirement than I am today, I contribute to the Roth IRA now and the Trad IRA I just trade with the amount it has.

If CAN SLIM is so great, why not trade with all of my capital? Originally this is the question I asked myself. Fortunately my coworker and fellow CanSlimmer (see his investing blog here)is less aggressive and probably more prudent than I am, and he gave me the following advice: 'Don't nuke yourself!' Ok, there was more to it than that, but the basic premise is pretty simple. If I'm successful investing, I won't need my 401k and IRA to generate wealth. If I'm unsuccessful, I'll be glad I left them alone and should still be able to retire comfortably on their proceeds.

That brings me to this week. I've been buying a Loomis Sayles bond fund, (LSBRX), for a couple of years for my son's education IRA. This is a well respected, well managed, well performing fund historically. Not surprisingly, it's been beaten down this year, particularly in the past few weeks. It trades around $10 NAV now, when I began buying it it was at $15 NAV. This doesn't concern me for my son's education because I believe my time horizon is long enough (at least 10 more years) that I'll have a good exit point and because I contribute monthly so I'll dollar cost average down during these low points. Furthermore, the fund is now yielding close to 9% so each month I reinvest that at this all time low price.

With my outlook on the stock market and belief that we have another year left in this bear market, I decided to take my entire Traditional IRA, which is about 33% of my total trading portfolio, and put it in (LSBRX). While I don't subscribe to bottom fishing in individual equities, I think it can be done in funds, particularly those with a strong track record and a high yield. When the fear leaves the market (and it will) there should be plenty of buyers lining up for bonds with that kind of yield. In the meantime, I'll earn the 9% and if the price goes down further I don't mind leaving this money invested in LSBRX for a longer time period.

We should get a bear market rally soon and I've left myself plenty of working capital to take advantage of it.

-Geoff

Sell Rules

Now that I've been in cash for a couple of days, it's so hard to believe I held on to (SOL) for so long. The market is clearly broken for a few weeks now, I clearly should've just taken what profits I had left when it began correcting. It's so nice to watch now with nothing on the table, no stress with the ups and downs of the market. Of course I'm still a bit bruised from my mistakes, but I'll have years to make up for them.

Tonight I want to publish the sell rules I'll use. I'm going to list the defensive sell rules and the offensive sell rules. They are, like everything else in this venture, a work in progress - but I will follow them to the letter until I have a good reason to make a change. I'm going to also attempt to post them in short form on the sidebar of the blog website, for quick reference.

As I've stated, many of these rules are copied verbatim from a post made by williamsj55 on the investors.com forums. They are his interpretation of the CAN SLIM sell rules, and I could certainly rewrite them in my own words but I see no need. He got them from Bill O'Neil, who got them from many other traders and his own experience through the years. I've adjusted them as fits my style, but made no fundamental changes.

Defensive Sell Rules

• Sell anytime a stock falls 7% below my purchase price. This is described in 'The Successful Investor' (also by Bill O'Neil) as the "3-to-1 profit and loss percentage plan." In short, it means that if I lose 7% on two trades for every one that I make 20% on, I can stay in the game with relatively small loss of capital until my pick percentage increases.
• When one of the major indexes (Nasdaq, S&P 500, or the Dow) flashes 5 distribution days in 4 weeks, I will immediately sell any stocks up less than 20%. If I am holding any 'big winner' stocks (up more than 20%) I will put a 5% trailing stop order in for them.
• The defensive sell rules trump all offensive sell rules.

Offensive Sell Rules

• Take profits on a stock that increases 20-25% in more than three weeks. I will use a 5% trailing stop loss once a stock reaches a 20% increase from the proper buy point, in hopes this will minimize my downside and allow the upside if it wants to run. If the trailing stop is hurting more than helping I'll adjust my approach.
• If the stock shoots up 20% from a proper buy point within 3 weeks, I will try to hold that stock for 8 weeks. I will place a stop at break-even to ensure I don't lose money, but unless the market enters a correction I will leave the stop there and evaluate the stock after three weeks.
• I will sell if a stock makes a climax top. Warning signs for a climax top are: greatest weekly price spread, exhaustion gap, and break of the upper channel line. I'm not going to go into detail about these here.
• I will sell if a stock slashes it's 50 dma on heavy volume and fails to rebound above it within a day or two. In most cases, my other sell rules would have me out of a stock before this could happen.

That's it for now. Pretty simple really, but should keep me out of trouble if I follow them. A cursory look at my past trades indicates strictly following these rules would have me in better shape than I am today.

-Geoff

One Year in the Books

One year ago today I began a concentrated effort to become a successful stock trader. The market didn't throw me much of a celebration for my first anniversary.


The overall market extended it's decline today, crashing into the close following the 2pm release of the minutes from the last FOMC meeting. If I invest for 50 more years, maybe I'll understand why the market would sell off on the 'news' that inflation is a problem and growth is slowing. Who on planet earth hasn't heard these topics for the past year? That's why it's a fool's errand to try to figure out why the market moves - I spend my time on how it moves and what that means for me.


That brings me to my second frustration. I'm a big fan of Investor's Business Daily and the associated premium services. I read the paper every night. One section I never miss is the 'Big Picture,' which provides a synopsis of the market's action along with a statement of the market's outlook - whether it's in a rally, rally under pressure, or correction. I make my own decisions about the health of the market, but I also rely on the paper as a resource.


In the year I've been investing, I don't ever remember the market outlook going straight from Rally to Correction, but that's exactly what happened today. The column went from an almost too bullish stance straight to an end of the rally. They might be right, but to skip the 'rally under pressure' step almost implies that they were behind the curve on this one. I'm still not sure I agree we're in a correction, the S&P 500 and Nasdaq are still above their 50 dma's and have not even tested them yet. The Dow fell below it's 50 dma, but this index does not represent the health of the overall market well anymore.


Nonetheless, I will go ahead with the defensive playbook. Here's how I plan to handle my portfolio:


(SOL) is off it's highs but still up about 70%. I should be able to ride out a correction if it finds support at the 50 dma. It should, but obviously I don't know if it will. I may sell half of my position to lock in the gains and leave the other half for now.

(SOHU) is up about 14%. This one is trickier. Even if it does find support at the 50 dma, I don't know if it will hit it below my buy point - the 50 dma is still only around $60 and my cost basis is around $69. I may trail a stop up behind this one and just get out. I can always buy back in if it does bounce off the 50 dma.

(GU) is even. I will see how it opens and either lose a couple percent if it opens down or trail a stop up behind it if it opens up. I like the stock but I have no cushion to play with so it's best if I just try to get out of it.

As for the results of my first year trading, I lost about 8% of my capital. Considering that 2 weeks ago I was down 20%, I'll take it.

-Geoff